Did You Know: It Costs More to Replace Employees Than to Retain Them?

Have you noticed more “Help Wanted” signs in your community? Here in Columbus more and more businesses are hiring, seeking a range of positions from entry level to highly skilled professionals.

I hope the hiring is due to expanding employment, but I suspect some of it is caused by the need to replace employees who have chosen to leave for other opportunities. When employees leave, the cost to the organization can be very high.

A couple of recent articles point out the importance of retaining existing employees. One points out the costs of replacing employees, while the other highlights one company’s attempt to retain staff.

The first article reminds employers that if they are near the median of the range of compensation for their employees, it really means that half of their competition is paying more. This leaves employees with many options to take their knowledge and skills to the competition.

The article points out studies indicating most employees would choose to stay in their current jobs if they received a 5% compensation increase. While you may think your organization cannot afford to do this, you may not be able to afford not to increase compensation.

The author documents the total costs of replacing a $60,000 per year employee. He includes direct costs (developing job descriptions, advertising the position, selecting applicants for interviews, conducting interviews and background checks, training, and other costs) of $49,436. The article provides a more complete breakdown. He also considers indirect costs (such as loss of productivity, loss of institutional knowledge, declining morale, increased stress on managers, and other factors), estimating these costs at $100, 564.

The total cost of replacing the employee is $132,824 in this example, with an actual range of $120,000 to $180,000 depending on the position and the employer. The cost of providing the same employee with a 5% compensation increase to retain them would be $21,790.

Employee turnover can create a vicious cycle. As employees leave, the remaining staff is left to assume their duties until a replacement is hired. The longer the recruitment process, the more stress is placed on those remaining. This may push them to consider leaving, creating more vacancies and more stress. When this happens, the cost to the company spirals upward.

A second article cites an employer that has recognized these facts and is doing something to head off employee turnover. Ikea announced this week they are raising the average employee starting pay to nearly $12 per hour. They set the wages in each locale using the MIT Living Wage Calculator, which takes local variables into consideration.

Ikea is one of a growing list of organizations to increase compensation to help retain and attract employees. Rob Olson, chief financial officer for Ikea U.S., believes that the company is already reaping dividends from its decision to increase the wage floor and to factor in the local cost of living in doing so. He said Ikea is on pace to reduce turnover by at least 5% this fiscal year and is also attracting more qualified job seekers.

While increasing compensation is a good way to attract and retain employees, it may not be a long-term solution. Numerous studies have shown compensation increases do not produce a lasting effect in employee morale. The short-term benefits will pay off for a while, but creating lasting changes to improve the workplace over the long term takes more effort.

An employee engagement process can help identify the factors beyond compensation that cause staff to leave. Procedures can be developed that will increase overall job satisfaction and retention. Employers have the opportunity to use the knowledge of employees to improve their workplace before those employees head out the door.

If your organization is interested in building or improving an employee engagement process, contact CALMC. We can help you develop a process that will identify the causes of turnover and find ways to retain your employees.



About CALMC Blog

Columbus Area Labor-Management Committee is a not-for-profit organization dedicated to involving employers and employees to preserve jobs, resolve workplace issues, and promote labor-management cooperation. Visit our website at http://calmc.org
This entry was posted in Employee Engagement, Employee Involvement, Job Retention and tagged , , , , , , , , , , , . Bookmark the permalink.

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